Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Could Variable Annuities be too cheap?
Old 01-11-2007, 11:10 AM   #1
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Could Variable Annuities be too cheap?

Intersting article from professor Moshe Milevsky about the currect state of variable annuities sold with living benefits.

I have always though that the these companies might be selling these living benefits much too cheaply considering what it would cost to do the same thing using exchange traded options. I feel better now that somebody with much more credibility than I agrees with me

http://www.researchmag.com/cms/resea...-C5B2976B3A15}
__________________

__________________
saluki9 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Could Variable Annuities be too cheap?
Old 01-11-2007, 11:14 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Could Variable Annuities be too cheap?

They have sold VA options too cheap for years, depending on sub-optimal exercise by consumers to make up the difference. The smarter companies have incorporated product features that reduce the value of the option or go out and hedge. But there will be pain in the next downturn.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-11-2007, 11:29 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Re: Could Variable Annuities be too cheap?

I read that too. Milevsky has a lot of credibility, having "called out" the VA folks about their heavy M&E a few years back.

However, I would like to point out that:

1)I don't "feel sorry" for the VA providers, they have enough money to pay for good actuaries.

2)Since they still are collecting on average 1.00-1.25 a year in M&E, their risk is covered more than is suggested.

3)Most people never annuitize or use the living benefits anyways, and the longer that statistic holds, the bigger the "risk pool" of money the insurer has to pay claims............they are already starting to increase living rider benefit charges slowly the past 3 years..........they're no dummies..............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-11-2007, 05:12 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Re: Could Variable Annuities be too cheap?

Funny how no one other than us finance types are commenting on this..............maybe we need a thread on triangular currency arbitrage or discuss Elliot Wave theory to get them jumping..............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-11-2007, 09:17 PM   #5
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by FinanceDude
...or discuss Elliot Wave theory to get them jumping..............
SWEET!
__________________
saluki9 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-11-2007, 10:12 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by FinanceDude
Funny how no one other than us finance types are commenting on this..............maybe we need a thread on triangular currency arbitrage or discuss Elliot Wave theory to get them jumping..............
You flatter yourself. You are a salesman.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 11:15 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by HaHa
You flatter yourself. You are a salesman.

Ha
Why are we always fighting??
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 11:43 AM   #8
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by FinanceDude
Why are we always fighting??
Because there just isn't enough love here
__________________
saluki9 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 11:45 AM   #9
Full time employment: Posting here.
Alex's Avatar
 
Join Date: May 2006
Posts: 696
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by HaHa
You flatter yourself. You are a salesman.

Ha
you've got that backwards. You've actually flattered him by calling him a salesman. Nothing happens in this world until a sale is made, nothing. In fact, salespeople are the life blood of the entire world economy! I am proud to be a professional salesperson.
__________________
Oh, you hate your job? Why didn't you say so? There's a support group for that. It's called EVERYBODY, and they meet at the bar.--Drew Carey
Alex is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 12:08 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by FinanceDude
Why are we always fighting??
The exact reason that I sniped at you was your snide comment:

Quote:
Funny how no one other than us finance types are commenting on this..............maybe we need a thread on triangular currency arbitrage or discuss Elliot Wave theory to get them jumping..............
Who are the "them"? Who is the "us"?

I'm sure you are a skilled actuary, MPT optimizer, et. - but really how much time do you have for these true loves when the sexy tarts of commissions and fees are so willingly available?

Ha

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 12:24 PM   #11
Recycles dryer sheets
 
Join Date: Aug 2003
Posts: 474
Re: Could Variable Annuities be too cheap?

There is an interesting subtext in this report that I had never considered. If an annuity is priced too high, then it is a bad investment. Surprisingly, if it is priced cheaply, then the insurance company solvency is threatened, and it may still be a bad investment. That's a tough one.

The paper mentions guaranteed minimum withdrawal benefits costing only 30-50 basis points. Where can I buy a policy like that? Everything that I've seen has fees much much higher. Vanguard, which can generally be counted on for low fees, charges 32 bps for their annual step up death benefit.
__________________
bongo2 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 12:27 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by HaHa
The exact reason that I sniped at you was your snide comment:

Who are the "them"? Who is the "us"?

I'm sure you are a skilled actuary, MPT optimizer, et. - but really how much time do you have for these true loves when the sexy tarts of commissions and fees are so willingly available?
Well............I don't run a commission business. I was being facetious about the fact that noone had a comment on the VA critic article that saluki posted. This guy is brilliant, and makes a great case in the article how he doesn't believe that insurers are adequately charging for a benefit, versus overcharging for a lesser benefit. He is not a friend to the VA industry..............

I appreciate your input on here, as I do with many others. To answer the larger question, I am a student of finance, not just as an advisor. I find intriguing the way markets work, how hedging and arbitrage are done, etc. This has little to do with my advisor business, and a lot to do with personal interest.............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 12:39 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Could Variable Annuities be too cheap?

I can tell you from my personal experience: most of the largest players in the VA business do not underwrite the insurance risks they take on, they do not charge enough to cover the cost of the hedges, and they do (at best) partial hedging of these guarantees. When the next downturn happens, there will be more Allmericas.

In the bad old days of early 2003, a very senior executive of a large European life insurer told me that he had a pretty good idea which competitors would be insolvent at each level of the European market indexes.

PS If I am ever bored with life after retring, one of the things I will do is track down Prof. Milevsky and/or his proteges for a chat or just to sit in on a few lectures.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 01:45 PM   #14
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by bongo2


The paper mentions guaranteed minimum withdrawal benefits costing only 30-50 basis points. Where can I buy a policy like that? Everything that I've seen has fees much much higher. Vanguard, which can generally be counted on for low fees, charges 32 bps for their annual step up death benefit.
Just found an ING product sheet on the web. Minimum 7% return with ratchet costs 50bps. If I didn't have to pay the M&E of 140bps I would do that in a second.

Think about it, buy that option and load it up with EM and small cap. The worst you could do would be 7% compounded.
__________________
saluki9 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 01:49 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by saluki9
Think about it, buy that option and load it up with EM and small cap. The worst you could do would be 7% compounded.
Will they let you do that? I know that at least the companies I think of as better run in the VA biz don't allow such things.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 02:07 PM   #16
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by brewer12345
Will they let you do that? I know that at least the companies I think of as better run in the VA biz don't allow such things.
You bet. I know somebody who wholesales for them who said that is what he does with his own contract.
__________________
saluki9 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 02:08 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by saluki9
Think about it, buy that option and load it up with EM and small cap. The worst you could do would be 7% compounded.
Wouldn't you want to concentrate a single VA as much as possible and have multiple VA contracts with a different product in each instead of mixing EM and small cap in one VA?

In other words, put 50% in an EM VA, then 50% in a small cap VA. You're guaranteed a min of 7% on EACH portfolio component, plus anything over 7% that either portfolio does.

I know almost zero about these products, but is the 7% minimum return expressed net of the M&E expenses?
__________________
justin is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 02:11 PM   #18
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by justin


I know almost zero about these products, but is the 7% minimum return expressed net of the M&E expenses?
I don't think so, but even if not just think about it. You get all the upside from risky asset classes and at the WORST you wind up with the return on a 30 year treasury (7% - 175bps)

__________________
saluki9 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 02:20 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by saluki9
You bet. I know somebody who wholesales for them who said that is what he does with his own contract.
Spooky. Amazing how quickly people who should know better forget the lessons of the last downturn.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Could Variable Annuities be too cheap?
Old 01-12-2007, 08:01 PM   #20
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,620
Re: Could Variable Annuities be too cheap?

Quote:
Originally Posted by brewer12345
PS If I am ever bored with life after retring, one of the things I will do is track down Prof. Milevsky and/or his proteges for a chat or just to sit in on a few lectures.
You'll find yourself saying "Well, I'm doing it as soon as these kids are out of the nest, and this time I really mean it!"
__________________

__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Variable Annuities? Worth it? Breitling Young Dreamers 17 04-23-2007 11:28 AM
Annuities: Now, later, never? ats5g FIRE and Money 1 10-30-2006 12:02 PM
Tax advantaged accounts / variable annuities aw78 FIRE and Money 20 08-04-2006 12:56 PM
We're Saved! Buy Variable Annuities 2B FIRE and Money 8 07-11-2006 07:37 AM
Variable Annuities Craig FIRE and Money 8 01-13-2005 05:27 PM

 

 
All times are GMT -6. The time now is 05:08 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.